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Republic Airways Holdings and Southwest Airlines each are prepared to pay more than $100 million to acquire bankrupt Frontier Airlines in an auction this week. The winner likley will be announced next week.
Seemingly the favorite, with vastly greater financial firepower than Republic, Southwest, should it win the bidding, during a 24-month integration process would fold Frontier--the 10th-largest U.S. carrier--into its operations and maintain flights to "all existing" Frontier markets. Those include 27 destinations to which Southwest currently does not fly, notably Atlanta, Washington National, five Mexican cities and San Jose, Costa Rica. Southwest also said it would initiate nonstop routes from Denver International not currently served by Southwest or Frontier.
Already the largest domestic U.S. operator in terms of passengers carried, Southwest would become the clear number-two competitor--behind United Airlines--at one of the world's busiest airports, Denver.. According to Airports Council International, Denver International in 2008 ranked 10th in the world by total passengers and fifth in the United States.
Having first submitted a bid of $108.8 million--about $60 million less than Southwest's subsequent binding cash offer--Republic, should it prevail, would operate Frontier as a separate brand and a standalone operation. Republic's other entities include recently acquired Midwest Airlines and regional carriers Chautauqua Airlines, Republic Airlines and Shuttle America, which serve as feeders for several major U.S. carriers.
Frontier and its advisors and creditors will sort out which proposal is better during an auction process set to start Aug. 13. The company said it would "evaluate the proposed final offers, taking into consideration a number of factors in addition to the dollar amount." Frontier's choice then would require final approval by the bankruptcy judge overseeing its Chapter 11 restructuring and review by the U.S. Department of Justice, which could take a few months.
By virtue of its access to capital and relative health, Southwest is better positioned than most to pick up distressed assets from other carriers. It also has ambitions to grow its operations despite challenging market conditions.
"We maintain a strong balance sheet and a strong cash position and prepare for the future during good times and bad for a reason, and this is one of those reasons," said Southwest executive vice president of strategy and planning Bob Jordan.
"This allows us to accelerate growth much more rapidly than if we were to try to do it organically," added Southwest executive vice president of corporate services Ron Ricks. When asked why the airline wants to grow quickly during a period of depressed air travel demand, Ricks described Denver as "a pocket of opportunity in a sea of pain" and "well-poised for future growth."
The situation is similar to Southwest's pursuit of ATA Airlines in 2004. Then the 10th-largest U.S. carrier, ATA had a presence Chicago--a large market in which Southwest already had been operating but aspired to grow quickly. Restructuring in bankruptcy, ATA had another suitor (AirTran Airways) but ultimately selected Southwest to fund its reorganization. Southwest gained market share in Chicago and ultimately acquired ATA's assets at New York LaGuardia, giving Southwest a toehold there.
Southwest said it would acquire "approximately 80 percent of Frontier's existing Airbus fleet, which translates into about 40 aircraft," plus "all" of Frontier's Lynx Aviation regional operation. "Initially, Frontier would operate its Airbus aircraft as it does today," according to Southwest, meaning the Frontier brand would be maintained. However, in the two years from the time the potential merger closes, Southwest would retire the Airbus fleet, transition Frontier services to Southwest Boeing 737 jets and gradually wind down the Frontier brand.
Southwest already operates 113 daily flights from Denver to 34 destinations. Frontier serves 27 markets nonstop from Denver that Southwest does not, including Detroit, Milwaukee and New York LaGuardia. Frontier's Mexican routes also would enable Southwest "in a very quick way to do some new things that we have not been able to do, such as the near-international service," Ricks explained. The carriers overlap on 29 nonstop routes (see chart below).
Frontier's Lynx operation, which uses 10 Q400 turboprop aircraft, "is a very popular part of the Frontier brand and serves a lot of important smaller communities," Ricks said. When asked why Southwest would want to play in the regional game--which it has long shunned--Ricks said, "Just because we have one way of doing things doesn't mean we can't learn from someone else."
Currently, United accounts for 37 percent of Denver outbound passengers, according to Darryl Jenkins, founder of airline economics firm The Airline Zone. Combined, Frontier (24 percent) and Southwest (12 percent) are roughly equivalent to United.
Should the merger go through, however, Southwest likely would "rationalize the route structure," Jenkins said. "When you eliminate frequency, you eliminate the bottom tier of fares. Fewer low-fare seats to sell means each plane goes out with a higher amount of revenue."
According to Jenkins, Southwest and Frontier have a similar fare structure and average purchase fares that are very close, though "Southwest passengers on average pay just a little more," he said.
Competing Against United
Southwest also would seek to add more nonstop service from Denver. "There is a large number of nonstop monopoly routes with high average fares, with United being the monopoly carrier on those routes," Ricks said. "That creates a lot of growth opportunities" for both mainline and Lynx regional operations. "We know that we'll have our hands full competing against a very large and formidable competitor in United," he said.
"Southwest likes to compete against United. Southwest has not been making money in Denver," according to a blog post by Robert Polk, CEO of Denver-based Polk Majestic Travel. "Taking out a major competitor will allow them a much better chance to become profitable in Denver."
United Airlines in a July 31 message told employees that "competing with low-cost carriers is nothing new for United in Denver or in other United cities. Today with the combination of Southwest and Frontier, the majority of our revenue in Denver is exposed to low-cost carrier competition." The airline said it currently operates "436 average daily departures out of Denver--three times more than Southwest or Frontier."
Jenkins concluded that "United has not been harmed by Southwest's incursion into Denver and will not be hurt by the [potential Southwest-Frontier] merger."
Meanwhile, should Southwest win the right to absorb Frontier, it would face countless integration challenges, ranging from employee labor groups and frequent flyer programs to disparate corporate sales and distribution strategies.
On distribution, Frontier lists in all major global distribution systems. Southwest is available in Sabre and Travelport ( for a fee) but not Amadeus. Frontier also participates with certain online travel agencies including Expedia, whereas Southwest does not.
Regarding corporate sales, the two airlines seemingly are moving in different directions. Southwest in recent years has built a sales force, expressed a willingness to negotiate with corporations and introduced products and services targeting business travelers. Frontier made an effort to cut in half the number of corporate accounts it dealt with--providing discounts only to those able to shift share its way--according to then vice president of distribution, sales and marketing Jim Young in a January 2009 interview with The Beat.
Republic Still In The Game ... For Now
If Republic's bid is chosen, it would add Frontier to a portfolio that includes the regional carriers that collectively operate 1,200 daily flights to 92 cities as affiliates for American, Continental, Delta, Midwest, United and US Airways. Put it all together with Midwest and Frontier, and Republic would be something of a major U.S. carrier. Frontier by itself maintains that distinction; passenger revenue for its fiscal year ended March 31, 2009, was $1.1 billion, just above the annual $1 billion threshold the U.S. Department of Transportation uses to define a "major" U.S. carrier.
"Republic is a very capable carrier with a strong balance sheet for an airline," Polk. "Southwest is much, much stronger and will prevail."
Jenkins agreed. "Republic has pockets but they are not anywhere as deep as Southwest's. Republic had a perfectly good strategy for becoming one of the top 10 airlines in the United States, but I expect Southwest will outlast them without much sweat" in the event of a bidding war.
Interestingly, Frontier in June announced it had inked a codeshare deal with Midwest, as Republic was acquiring Midwest and pursuing Frontier. It is unclear if Southwest would maintain that agreement should it win Frontier.
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